This document discusses innovation as a necessity for business growth and survival. It defines innovation as changes or modifications to existing products, processes, positions or paradigms. The document outlines different types of innovation and provides historical examples of companies like Nokia, Apple, 3M and Polaroid that successfully innovated, as well as those like Kodak and Agfa that failed to innovate. It stresses that innovation is needed to create new profit sources and competitive advantages, and that both incremental and breakthrough innovations are important.

1. Innovation … as a business growth tool Dr. Jean-Jacques Lagref [email_address]

2. The future is made of…... WHAT is the NEXT BIG THING in your company ?

3. Agenda Circumstances of this presentation (Why?) General view of Innovation knowledge, basic rules, how it works, what is required... Various Examples Agfa, Polaroid, Nokia, Apple, 3M, Pfizer, Xerox. Predicting (How?) the changes, the next big thing, customer expectations…

4. Why doing Innovation has become a necessity? the cost reduction strategy reached its limits low cost goods face hard price competition from emerging countries prepare the future, help establish a strategic vision every company reach a « plateau » level when the tech is mature, then follow a decrease in sells. The investors pressure to increase growth implies to find new sources of growth. to sustain on the long term the company existence (cf Clayton Christensen and the need of breakthrough innovations as the only long term growth source)

5. Definition INNOVATION is a CHANGE, a MODIFICATION of the EXISTING is a « creative destruction », Joseph Schumpeter EXISTING ? 4 Categories or “4 P rule” P roduct ...Innovation modification at good / service levels P rocess ...Innovation modification at the way the goods/services are produced P osition ...Innovation modification of the environment where the goods/services are introduced (Mobile with SMS and specific services related ex. chat, dating…) P aradigm ...Innovation modification of the thinking models of the company (low cost flight companies, e-banking, e-casino gambling, Starbuck with the coffee..etc)

6. Innovation as a strategy (according to Joseph Schumpeter, economist) WHY ? The motivation is the search of new profit SOURCES WHAT ? “ what is important is that the advantage created by the new (product, technol., process…) will impact not only the profit margins, … but also the existence of the companies” HOW ? Step 1: Entrepreneurs will use innovation to obtain a strategic advantage that will generate « monopolistic profits ». Step 2: Competitors will enter the game and try to do the same or better. New ideas will kill the “monopolistic profits” till an equilibrium is reached. At this stage, the cycle will restart and innovation will generate new gaming rules and so on.

7. Innovation dynamics New profit SOURCES New Gaming RULES HOW to make the cycle turn ? HOW to make it only successful ? HOW to increase the turn over ? HOW to capitalize on failures ? HOW to develop knowledge ? KNOWLEDGE = FUEL

8. Innovation and Profit Margins How Innovation helps make better profits: a) reaching low cost production b) by new product differentiation (segmentation) Low cost strategy Relative quality is better Innovation of product Better relative value Brand reputation increased Increase of market share Innovation of process OUTPUT

9. Innovation and Profit Margins (2) Taken together: Innovation, relative value, reliable brand increase the market share. Product innovation and the market growth: quasi linear relation companies with less than 1% of new products (seen on 3 years) face net annual growths around 1% companies having 8% of new products have 8% of net annual growth RQ: For a large consumer market, the introduction of new products is necessary but not sufficient for sustainable growth. A good branding will complete and reinforce the growth . REF: T. Clayton and G. Turner, From Knowledge Management to Strategic competence: Measuring technological market and organizational innovation. Imperial College Press, (2000).

10. The parameters of Innovation Which type of Innovation for which circumstances ? Which extent ? Breakthrough or Incremental type ? PARADIGM PRODUCT / SERVICE POSITION Incremental INNOVATION PROCESS BreakThrough.

11. Breakthrough / continuous Breakthrough/continuous Breakthrough innovation: 6 to 10% of all innovations Incremental Innovation: 90 to 94% are incremental and generate globally more value * Ettlie, J. (1999), Managing Innovation.John Wiley&Sons,Inc.,NY.

12. The parameters of Innovation: different outputs Degree of creativity Component Level System Level Incremental “ doing better what we are doing” Radical/ Breakthrough “ new for the world” “ new for the company” New models: cars, aircrafts, TV New ways, new habits: MP3 downloads/CD Steam engine, biotech Inf. & Com. technol. Improvement of components New components for existing systems Advanced materials to improve performances

13. The basement of Innovation: a recipe ? Screening of 160 companies from 1986 to 1996 : 200 management criteria screened. All Successful companies were using 4 essential criteria and 2 secondary (from 4). C ulture: capacity to develop and sustain a performance oriented culture E xecution: in a very smooth way S trategy: capacity to have a clear and focus vision S tructure: capacity to built and maintain a fast, flexible organization having a low hierarchy levels. Talent: keep and hire the best ones Leadership: keep the best leaders Innovation: new ways / products to do business Acquisition and partnership: ways to grow W. Joyce, N. Nohria, B. Roberson, What really works-The 4+2 formula for sustained business success , HarperBusiness, 2003.

14. Agenda Circumstances of this presentation (Why?) General view of Innovation knowledge, basic rules, how it works, what is required... Various Examples Agfa, Polaroid, Nokia, Apple, 3M, Pfizer, Xerox. Predicting (How?) the changes, the next big thing, customer expectations… The Idea proposal

15. Innovation: Historical case study (1) NCR: mechanical business machines: founded in 1884. 1971: 140 millions$ lost: missed the electronic revolutions Illford: silver technology photo-papers, founded around 1875. in 2004 near bankrupt, 60 millions euros lost: missed the digital technology Agfa-Gevaert: has not been in the game of digital photography. Result: in 1990: 8500 collaborators in 2006: 3000 collaborators only Nokia

16. Historical case study(2): AGFA-Geveart founded in 19th century by Lieven Geveart:calcium paper 1939: first entry on the stock market and become specialist in medical photograpgy (X rays..) 1964, bought by Agfa.AG 1990, 1st signs of difficulties / digital cameras and printers, same for Kodak and Fuji 1999, 1700 jobs cut. 2001, 4000 jobs cut. 2004, 2000 jobs cut. 2006, 1000 jobs cut in 2007. 2006, rise of cost for row material like Al and Ag (highest in 25 years) 2007: reorganization in 3 sectors: Materials, Healthcare, Graphics. Cost 250 millions euros. Explanations? may be Strategy: capacity to have a clear and focus vision Structure: capacity to built and maintain a fast, flexible organization having a low hierarchy levels. Talent: keep and hire the best ones Innovation: new ways / products to do business Acquisition and partnership: ways to grow

17. Historical case study(3): Polaroid leader in innovation founded in 1937, by Edwin Land (500 patents in his life) 1948: 1st camera with direct « printing »= Breakthrough Innovation 1963: 1st camera in color « direct printing » 1978: invention of autofocus tech. using a echo location Between 1948 and 1978: benefit growth /year = 17% 1981: foundation of a group specialist on digital picture technology(DPT) 1989: (42% of R&D budget) spent in DPT 1990: 28% of the patents were linked to DPT 1996: Polaroid is absent from the Digital revolution. Why? How? Worse! While expert in high quality printing, Polaroid is absent from the home printers market. Why? How? Ref:M. Tripsas, Strategic Management Journal, 21, 1147-1161, 2000. Explanations? may be Strategy: capacity to have a clear and focus vision Structure: capacity to built and maintain a fast, flexible organization having a low hierarchy levels. Acquisition and partnership: ways to grow

18. Historical case (4): Nokia founded in 1865. Company was in the wood business. till 1960 stayed in the paper industry. Start to diversify. 1985: Nokia acquired Teleste, a small telecom company. 1991: Nokia bought Technophone, a UK telecom company 1992: new CEO, Jorma Ollila graduated at London School of Economics. Nokia in 1992 had businesses in Aluminium, cables, paper, tires, TV, rubber, energy and real estate. 1995: 90% of Nokia revenues are from telecom business (14% in 1985) Since, strong annual growth rate close to 40%, profit marging of 25%, 30% of the market, 60% of the profits made in the mobile phone business. In 2004, Nokia has 44000 employees, 9% of income dedicated to R&D, 14000 employees in R&D, design and product creation. Explanations? may be Strategy: by the new CEO strategy was: global + telecom oriented+ mobile targeted+high value added. Structure: fast, flexible organization 50% employees have less than 3 years in company. Age average = 32 in 2004. Acquisition and partnership

19. Apple: Mastered Innovation Why 50 000 mobiles at 500$ each sold in 1,5 day (Friday evening to Sunday morning) Queuing of 24hrs in front of shop (customers in sleeping bags in front of shops) Apple iPhone is not a technically TOP product Apple inverts the game rules: for the 1st time the power is in the hand of the mobile manufacturer !! Exclusive licencies are given to AT&T for US and Orange... SIM card is blocked for ever! Telecom companies agreed to give 10% of the money generated by voice and data transited via the iPhone. Apple products interacts contributing to their ease of use (computers, iPhone, iPod, iTunes web content). Apple Businesses are dynamically linked to each others if one business works, the others will be positively impacted Strong Re-thinking capacity 13th March 2006, published a patent for a new mouse!

20. Failures and Innovation: Dramatic…profits !! Does Innovation by making errors exist? 3M: Post it. Error in the lab mixtures. High adhesion was targeted. + 1 billion $ of revenues Pfizer: drug UK-92,480. Promising candidate till human trials for Angina treatment. despite negative results, teams continue to work on to use a side effect!! UK-92,480 1st drug used for its side effect revenue of 1,5 billion $ / year (2002) UK-92,480 is the 1st pharma drug to be tracked by RFID! (2007) UK-92,480 is known as Viagra. Xerox: because of a too heterogeneous technology portfolio -> 11 of 35 projects rejected! Consequences: these 11 rejected projects resulted in stock market capitalization 2 times bigger than Xerox itself !! Ethernet commercialized by 3 Com PostScript language used by Adobe Systems... Etc..

21. The future is made of…... PAST is EASY … but WHAT is the NEXT BIG THING ??

22. From observation to SEEING WHAT ’S NEXT* Time Ex1, Ex2…Exn Today Logic! Easy ! I see, I see….??? 3M, Pfizer, Nokia, Xerox, Apple... *Clayton M. Christensen, Seeing what ’s next, Harvard Business School Press, 2004

23. Predicting: real case exercice Just Imagine, we are in 1876. The telegraph is the most used communication tool. Alex Graham Bell found a way to transmit voice over a wire. He goes to Western Union (world largest telecom Cie) to sell a licence. The WU’s CEO said “what use could this company make of an electrical toy?”. Limitated invention? yes Indeed, calls could have been made within 6km distances. In 1879, AG Bell founds the Bell company and sold 17000 phones. 1 millions in 1900. 1900: Income of Western Union=6 millions$ Bell Company= 13 millions$ 1910: Bell company took the incumbent WU and created AT&T

24. How to predict the Fate of Firms and Indust. Which emerging technologies are consumers likely to embrace? Why SMS is so popular?, why full-motion video on the net appears only now when BT had a proven solution since last 1990?…) Does an entrant pose a legitimate threat to a leading incumbent? How will government regulation affect competitive battles? … .

25. Contacts Dr Lagref Jean-Jacques, [email_address] graduated from University Louis Pasteur (Fr) and Swiss Institute of Technology EPF Lausanne Worked in multinational innovative environments (Novartis Pharma, Arkema.SA, Huntsman Advanced Materials)